http://www.ncbresearch.com/daily/NCBLatestIrishEquities.pdf (original source)

• The bid for Dragon Oil by Dubai’s ENOC was soundly defeated, achieving only 49% of
the votes by holdings rather than the 75% required. Votes in favour of the bid
accounted for just 28% of the free float. This implies a relatively small overhang (13.6%
of the total holding) of arbitrageurs and weak holders, which we expect to be quickly
flushed out. The stock fell from 388p to 360p immediately after the announcement and
recovered to 379.75 by the close.
• We believe the Dragon Oil can regard this as a vote of confidence in management and
the company as a standalone entity, its plans and long term potential. They can now
concentrate on continuing to demonstrate operational performance and delivery, and
finalising the commercialisation of the gas reserves. With four rigs operational, they
should be on track in their drilling programme for 2009-2010, with production growth
accelerating next year.
• With the opening of the connection of the export pipe to China (see below) and
expected restart of gas sales by Turkmenistan to Gazprom, we think the background for
commercialisation of gas is now stronger than it has been for most of this year, and we
expect to see progress comfortably in advance of the completion of gas separation
scheduled for the end of next year. We note that last week, Shenzen Gas announced
that it is paying CNPC $11.40/mmbtu for gas from Central Asia, as CNPC expands its
supplies.
• Beyond the operational momentum of Dragon itself, the position of ENOC in the wake
of the failed bid also raises questions which could have positive implications for
shareholders. We believe the access to Dragon’s cash which was a key driver of the
bid for ENOC means that they may wish to consider a special dividend, for which we
would see greater shareholder support. We would however watch for any indication that
ENOC press for any farmout of Dragon’s 100% stake to realise additional cash, but
note that with access to just over half the receipts this option is less attractive to ENOC,
who will also want to maximise their upstream hedge.
• The bigger question remains over whether ENOC will contemplate (or be able to resist)
selling down its stake, which without the blocking stake will have significantly greater
value. We have regularly pointed out the strategic attraction of the area to industry
players, and the pace of declarations of interest in the region (both explicit and implicit)
has accelerated during the timetable of the bid. Over the last three weeks, the
President of Turkmenistan has had meetings with the presidents of Italy, Russia and
China, with the latter in the country this weekend to open the pipeline to Xingjiang and
into the West-East pipeline. Turkmen gas sales are expected to start at 5bcma next
year then ramp up once the eastern section of the second West-East pipeline is
completed in 2011 (CNPC has signed a deal for 30bcma with an option to increase to
40bcma).
• We congratulate the shareholders for rejecting the offer from ENOC despite some
pressure and short term downside risk (which we estimated down to 370-380p). We
have confidence in the management of Dragon and expect them to renew focus on
operational momentum and building on the faith shown by their major shareholders,
which will drive underlying value. Over and above that, we do not rule out further
corporate interest for Dragon despite the stated commitment by ENOC to hold to end
2011 – we are sure that Dubai’s luxury resort Atlantis did not expect to offer flights from
UK and three nights at $699 when it did its business plan, but times change.
Peter Hutton, +44 20 7071 5227 peter.hutton@ncb.ie